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13th December – The not-so bright idea of selling the family silver

When we examine the proposed stake sale of profit-making public sector undertakings (PSUs), a few strategic issues of national importance need to be considered.

  1. The first is an ideological one — that Government must get out of business.
  2. The second is the need to bring the fiscal deficit down.
  3. The third is a long-term financial one: which option, public- or privately-owned, is better for the Government treasury?
  4. A fourth is about national security and self reliance: can India be under pressure if we do not have full control over petroleum? Why do the United States, China and other superpowers have control over their petroleum reserves?

Background

  • The Burmah Shell (Acquisition of Undertakings in India) Act 1976 enabled the Government of India to take ownership by paying ₹27.75 crore.
  • One estimate of that amount in today’s terms is to use the inflation factor, which is about 22.42 (between the year 1976 and now). This means that the Government would have paid ₹622.06 crore today. The current market value of Bharat Petroleum Corporation Limited (BPCL) varies between ₹85,000 crore and ₹115,000 crore. The government’s share at present is about 53.3%(which it is contemplating selling), that is worth between ₹45,000 crore and ₹61,500 crore. It means that the government got the company for a throwaway price.

Revenue from PSUs –

  • Since 2011, the total dividend it has earned is about ₹15,000 crore, which is several times the present value of the investment of ₹622 crore. Adjusting for the current trends of inflation, if the Government sells its entire stake, it would forego future income of about ₹78,589 crore.
  • In addition the BPCL has also paid taxes of about ₹25,000 crore to the Government since 2011. No doubt the Government will continue to get taxes from the private sector as well. However, the effective tax rate on profits before tax for the BPCL is about 34%, whereas for the private sector player it is between 25% and 28%. So there will be a loss in tax revenue for the Government after any privatisation.
  • In summary, financially, we as a nation are worse off by selling such a profitable venture. As the case of the BPCL and several other PSU ‘Navratnas’ show, they have given super normal returns to the public exchequer. Instead of selling such high performing PSUs, should we not be selling the loss-making ones?

On fiscal deficit target –

Another issue underlying the disinvestment is the fiscal deficit target of 3.4%, now reduced to 3.3%. Given that revenue collections are not enough, the Government is perhaps planning the sale of well-running PSUs to meet the fiscal deficit target. These strategic sales and dividends cannot be repeated every year. We will be back to the same levels of fiscal deficit. The real way of meeting this target is to cut out wasteful Government expenditure, most of which is on salaries and pensions, and ensuring that the bureaucracy delivers.

On national security –

  • Natural resources, especially oil, are a strategic national resource. The United States maintains such an underground crude oil reserve to mitigate any supply disruptions. Some comparative figures for such reserves are: the U.S. over 600 billion barrels, China 400, South Korea 146, Spain 120 and India 39.1. India does have a target to substantially increase its reserves. There are two (state-owned) Chinese companies in the top five oil companies; in fact Sinopec is the world’s second largest, just behind Aramco.
  • While China sticks to state-owned national resources, we are moving in the opposite direction. National security also depends on the economic power that a Government has. We do have plans to build perhaps the world’s largest refinery in India, with the help of Saudi Arabia, but ownership and control will be in foreign hands.
  • Meanwhile with the strategic disinvestments, we will lose Government control over both crude and refining. Nothing prevents China or any other country for that matter from buying up refining capacity in India.

Ideological debate –

We need to see through the ideological narrative coming from the developed nations. They embraced free trade when it suited them and are now trying to embrace protectionism. China adopted a market system but does not allow this to cloud its thinking when it comes to strategic national issues; the control then remains with the Government. India too needs to re-think its strategy.

SourceThe Hindu

QUESTION It is being argued on several grounds that disinvestment of profit making public sector units, especially in strategic sectors should be avoided. Discuss the factors involved in such a policy proposal and suggest a way forward.

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